Question

Ivanhoe Corporation wishes to exchange a machine used in its operations. Ivanhoe has received the following offers from other companies in the industry. 1. Shamrock Company offered to exchange a similar machine plus $34,500. (The exchange has commercial substance for both parties.) 2. Bridgeport Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.) 3. Indigo Company offered to exchange a similar machine, but wanted $4,500 in addition to Ivanhoe's machine. (The exchange has commercial substance for both parties.) In addition, Ivanhoe contacted Sweet Corporation, a dealer in machines. To obtain a new machine, Ivanhoe must pay $139,500 in addition to trading in its old machine. Machine cost Accumulated depreciation Fair value Ivanhoe $240,000 90,000 138,000 Shamrock Bridgeport Indigo Sweet $180,000 $228,000 $240,000 $195,000 67,500 106,500 112,500 103,500 138,000 142,500 277,500 -O- For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.)

Answer 1

From the information provided, a table can be drawn as under:

Particulars	Ivanhoe	Shamrock	Bridgeport	Indigo	Sweet
Machine Cost (A)	$        240,000	$        180,000	$        228,000	$        240,000	$        195,000
Accumulated depreciation (B)	$          90,000	$          67,500	$        106,500	$        112,500	$                   -
Net Book Value (A-B)	$        150,000	$        112,500	$        121,500	$        127,500	$        195,000
Fair Value	$        138,000	$        103,500	$        138,000	$        142,500	$        277,500

Book value = Cost - Accumulated depreciation

Whenever there is an exchange of assets between two parties, every party records the transaction in his books of accounts on the fair value of incoming assets i.e. the fair value of the asset it is going to receive.

Here the accounting transaction will be booked on the basis of fair value of the asset which is being received by the Company in exchange transaction

The accounting entries are:

No.	Account titles and explanation	Debit	Credit
1	Ivanhoe Corporation
	New Machine A/c Dr	$ 103,500
	Accumulated Depreciation A/c	$    90,000
	Cash A/c	$    34,500
	Loss on exchange of asset	$    12,000
	To Old Machine A/c		$ 240,000
	(being new machine acquired in exchange of old machine and cash received $ 34,500)
	Shamrock Company
	New Machine A/c Dr	$ 138,000
	Accumulated Depreciation A/c	$    67,500
	Loss on exchange of asset	$      9,000
	To Cash A/c		$    34,500
	To Old Machine A/c		$ 180,000
	Loss on exchange of asset
	(being new machine acquired in exchange of old machine and cash paid $ 34,500)
2	Ivanhoe Corporation
	New Machine A/c Dr	$ 138,000
	Accumulated Depreciation A/c	$    90,000
	Loss on exchange of asset	$    12,000
	To Old Machine A/c		$ 240,000
	(being new machine acquired in exchange of old machine)
	Bridgeport Company
	New Machine A/c Dr	$ 138,000
	Accumulated Depreciation A/c	$ 106,500
	To Profit on exchange of asset		$    16,500
	To Old Machine A/c		$ 228,000
	(being new machine acquired in exchange of old machine)
3	Ivanhoe Corporation
	New Machine A/c Dr	$ 142,500
	Accumulated Depreciation A/c	$    90,000
	Loss on exchange of asset	$    12,000
	To Old Machine A/c		$ 240,000
	To Cash A/c		$      4,500
	(being new machine acquired in exchange of old machine and cash paid $4,500)
	Indigo Company
	New Machine A/c Dr	$ 138,000
	Accumulated Depreciation A/c	$ 112,500
	Cash A/c	$      4,500
	To Profit on exchange of asset		$    15,000
	To Old Machine A/c		$ 240,000
	(being new machine acquired in exchange of old machine and cash received $4,500)
4	Ivanhoe Corporation
	New Machine A/c Dr	$ 277,500
	Accumulated Depreciation A/c	$    90,000
	Loss on exchange of asset	$    12,000
	To Old Machine A/c		$ 240,000
	To Cash A/c		$ 139,500
	(being new machine acquired in exchange of old machine and cash paid $139,500)
	Sweet Company
	(to record exchange of inventory)
	Cash A/c	$ 139,500
	Inventory A/c	$ 138,000
	To Sales A/c		$ 277,500
	(being machine (inventory) acquired in exchange of machine (inventory) and cash received $139,500)
	(to record cost of inventory)
	Cost of Goods Sold A/c	$ 195,000
	To Inventory A/c		$ 195,000
	(being cost of goods sold recognized for sale made- machine (inventory) exchanged for machine (inventory)

Explanation:

Scenario 1 to 3:

For scenario no. 1 where Shamrock Comapny offers to exchange its machine and $ 34,500 with Ivanhoes's Machine. In the books of Ivanhoe new machine will be recorded at the fair value of Shamrock's Machine because this is what Ivanhoe is receiving. Also Ivanhoe is receiving $34,500 from Shamrock in addition to machine. Shamrock will record new machine in his books of accounts at the fair value of Ivanhoe's machine because this is what Shamrock is receiving. Also Shamrock is paying $34,500 to Ivanhoe. Old machine will be recorded at its on cost in every Company's books of accounts. Accumulated depreciation will be debited of the machine which is being given away in exchange transaction. Accounting for scenario no. 2 & 3 is done on the same lines. Balancing profit / loss can be calculated and is to be recorded. For scenario 1 book value of old machine in Ivanhoe's books of accounts is $ 150,000 (book value calculated and shown in table drawn above). Ivanhoe received assets worth fair value of $ 103,500 from Shamrock & cash $34,500. Total of incoming assets for Ivanhoe comes to $138,000 while book value of given away asset is $150,000 hence loss for Ivanhoe in this transaction is $12,000 ($150,000 - $ 138,000)

Similarly gain / loss is being calculated for all the cases at scenario no. 2 & 3.

Scenario No. 4

For Ivanhoe accounting and gain / loss calculated and recorded as per the explanation given above.

For Sweet Company, explained as below:

For Ivanhoe, Shamrock , Bridgeport & Indigo this machine is a capital asset. While for Sweet Company it is inventory as mentioned in question. Accounting treatment in the books of Sweet Company will be different from that of others.

First Entry posted for Sweet Company shows that it has received inventory in exchange of its inventory which is being termed as sale in normal parlance. Sale is recorded at the fair value of incoming asset-inventory plus cash received.

Second entry records the cost of goods sold for the exchange of inventory i.e. sale made by Sweet Company. When cost of goods sold is recorded it is always recorded at the cost of outgoing inventory

Here no entry for gain / loss is being made in the books of Sweet Company because it is a sale and no individual gain/loss entry is required for it. Gain / loss for a period for sales transactions is being reflected in Profit & Loss A/c for that period.